How our unemployment is not like that in the US

The US is in uproar. Their unemployment* rate is at 9.6% after having briefly flirted with 10.1% a year earlier. It’s predicted to stay around this level for years.

The bulk of US unemployment is cyclical. Don’t let anyone tell you different (especially not in 1935). Cyclical unemployment arises when a shock (in this case, massive deleveraging of the economy) reduces aggregate demand to below full employment. Structural Unemployment, on the other hand, is where the jobs on offer are not matched to the skills of the unemployed.

Structural Unemployment has the following characteristics:

  1. Parts of the economy are at full employment – either geographically of by sector. There can’t be an overall mismatch of skills in every part of the economy at the same time.
  2. Inflation is high, relative to long-term averages. The full employment in some sectors drives up wage pressures and therefore general inflation in the economy.

US inflation is at multi-decade lows.  The proportion of businesses saying skills are a primary concern for them are close to all-time lows. Only three states, with low populations, have unemployment below 5%. US unemployment is cyclical (pdf).  That’s not to say this won’t cause the employment market to stagnate and bring non-cycical problems of its own.

Meanwhile in South Africa, we have 25.3% unemployment, have had problems with high inflation with unemployment at this same level and continually have employers complaining about skills shortages. This is pure academic nirvana as a case study of structural unemployment.

Simply growing the economy won’t fix it. History has proven this already.

*What is unemployment anyway?

Typically, unemployment rates are defined as those without work and actively seeking work over the total labour force.  It’s not a perfect definition, since “discouraged workers” who have given up looking for work are not counted as unemployed.  In many countries this makes sense, but when unemployment get to South African levels, I suspect discouragement is more prevalent. Unemployment rates in South Africa probably underestimate the true size of the problem as a result. (On the other hand, depending on how questions are asked, informal employment or underemployment may come up as employed or unemployed, further interfering with clear statistics.)

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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